Mustaine Enterprises, Inc has been considering the purchase of a new manufacturi
ID: 2709479 • Letter: M
Question
Mustaine Enterprises, Inc has been considering the purchase of a new manufacturing facility for $272,000 The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years. Operating revenues from the facility are expected to be $107,000, in nominal terms, at the end of the first year. The revenues are expected to increase at the inflation rate of 5 percent. Production costs at the end of the first year will be $32,000, in nominal terms, and they are expected to increase 6 percent per year. The real discount rate is 8 percent. The corporate tax rate is 34 percent. The company has other ongoing profitable operations.
How do I solve for the NVP?
Explanation / Answer
Particulars Year Cash Flows Net Of tax cash flows PVF @ 8% PV @ 21% Installed Cost 0 2,72,000.00 2,72,000.00 1 2,72,000 Production Costs 1 32,000.00 21,120.00 0.93 19,556 Production Costs 2 33,920.00 22,387.20 0.86 19,193 Production Costs 3 35,955.20 23,730.43 0.79 18,838 Production Costs 4 38,112.51 25,154.26 0.74 18,489 Production Costs 5 40,399.26 26,663.51 0.68 18,147 Production Costs 6 42,823.22 28,263.32 0.63 17,811 Production Costs 7 45,392.61 29,959.12 0.58 17,481 PV of cash outflws 4,01,514 Operating revenues 1 1,07,000.00 70,620.00 0.93 65,389 Operating revenues 2 1,12,350.00 74,151.00 0.86 63,573 Operating revenues 3 1,17,967.50 77,858.55 0.79 61,807 Operating revenues 4 1,23,865.88 81,751.48 0.74 60,090 Operating revenues 5 1,30,059.17 85,839.05 0.68 58,421 Operating revenues 6 1,36,562.13 90,131.00 0.63 56,798 Operating revenues 7 1,43,390.23 94,637.55 0.58 55,220 Tax Saving On depreciation 1 to 7 38,857.14 13,211.43 5.21 68,784 Present Value of cash Inflows 4,90,080 Net Present Value 88,565.58
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